Laying out his plans for the Prudential Regulation Authority (PRA) before a City audience, Bailey admitted that the new regulator being spun out of the Financial Services Authority next year could never stop all banks collapsing.
With the regulator adopting a more judgment-based, intrusive approach to regulation, Bailey said he wants his staff to focus on key issues rather than a wide range of potential problems, as in the past.
Attempting to demonstrate that he will take personal responsibility for the way the PRA regulates 300 banks, he said: "If I emphasise three things we should focus on in a firm and, as I occasionally get asked by supervisors, what if it is the fourth thing that blows the firm up. Well I've made that judgment. It may not be the right judgment in retrospect, but it is the one that I've made."
On secondment from the Bank of England, Bailey is currently acting head of the regulator following the resignation of Hector Sants, although he is expected to be formally appointed to the role.
Documents published alongside the presentation to City professionals showed that the new regulator has backed down from its proposals to tell banks how they are ranked on its new measurement of financial strength, for fear that it could cause them to collapse.
Last year, the FSA unveiled a five-stage assessment, the proactive intervention framework (PIF) – with firms ranked at number one regarded as facing a "low risk" to their viability, and five meaning "winding-up under way". At the time the FSA said that banks will know how they are ranked and did not rule out publishing those rankings.
The latest documents reveal that firms will not be told their rankings, as European rules may require them to inform their shareholders through stock exchange announcements about where they stand. The PRA, however, intends to publish the number of firms it has categorised in each of the five rankings.
"The PRA would prefer to disclose PIF stages to regulated firms as a means of summarising the PRA's overall judgment on safety and soundness. In view of the current disclosure obligations in European legislation, however, the Bank and the FSA have decided not to do so, given the risk that in some cases the firm may be under a legal obligation to disclose its PIF stage publicly," the documents said.
"The PRA will engage with HM Treasury to discuss whether it would be appropriate to pursue changes to relevant European legislation to support disclosure of such supervisory judgments to the firms but not to the market generally."
Bailey told the audience that his goal was for the "public to put their trust in a safe and stable banking system".
In an interview with the Financial Times, Bailey, a long-standing Bank of England employee, recalled a meeting with the treasurer of Royal Bank of Scotland during the 2008 banking crisis.
"The treasurer, John Cummins, came in and I thought he was going to have a heart attack … and he looked at me and said I need £25bn today, can you do it? I said, Yes, I can do that," Bailey said. He was confident he could because he had also been lending cash, privately, to HBOS.
The PRA is to be set up as a subsidiary inside the Bank of England in April.
guardian.co.uk © Guardian News and Media Limited 2010
image: © Greg Habermann